Describing the portfolio approach

Assignment Help Portfolio Management

Reference no: EM131790680

Question: Under the portfolio (i.e., asset) approach, suppose the New York interest rate is 4 percent (i_NY = 4%) and the Euro interest rate is 8 percent (i_euro = 8%). The expected future exchange rate is E^e_$/euro =1.20. For uncovered interest parity to hold, the current spot rate should be E_S/euro = _______. Recently quantitative easing by the U.S. Federal Reserve since 2008 has increased the U.S. money supply to prevent a depression. Suppose this expansionary monetary policy has reduced the New York interest rate to i_NY = 1.75%, while E^e_$/euro and i_euro remain unchanged. With a lower U.S. interest rate, financial markets in New York and Europe are said to be in ______ and funds should flow from _______ to ______, leading to a(n) _______ of the U.S. dollar to a value of _______ $/euro such that UIP holds:

a. 1.144; Disequilibrium; New York; Europe; appreciation; 1.28

b. 1.25; Disequilibrium; Europe; New York, appreciation; 1.18

c. 1.144; Disequilibrium; Europe; New York; depreciation; 1.18

d. 1.25; Disequilibrium; New York; Europe; depreciation; 1.28

Reference no: EM131790680

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